Last night I had dinner with Ravee Mehta, author of The Emotionally Intelligent Investor and former hedge fund trader at Soros Fund Management, hoping to learn more about getting a real news edge while trading. On my desk I hear my guys talking about Conviction Trades before the stock confirms their thesis. I have worked with very experienced discretionary traders who claim to trade off of fundamentals, who I wonder whether really have a news edge. I know many retail traders sit at home watching the Financial Media Entertainment Complex (which I write about in my next book (The PlayBook) prop up guru after guru making fundamental-based predictions. I wonder if too many on my desk, too many experienced discretionary traders, and too many retail traders are making fundamental plays without any real news edge at all.
For example many who make news trades say, “I read everything out there on a stock.” You drill down and learn that everything is everything that can be found online. I am skeptical that this would provide a news edge. Wouldn’t you need to also have the best paid research, years of experience dissecting news events, and models to help quantify your news edge?
I asked Ravee how he puts together his longer term trades, which are based mostly on fundamentals but also with a very interesting take on technical analysis that he writes about in his book. First he considers the worst case scenario for a potential trade/investment and what that would look like. He builds variables/scenarios that will prove his trade wrong. He visualizes this losing trade. When variables/scenarios hit that he mapped out for his losing trade then he exits. Also, Ravee outlines the psychology of all the players on his side of the trade. What will they do if the stock hits XYZ? What will each of the sub-players do along the way. And as the stock changes prices he constantly reassess the psychology of those on his side of the trade. Schooled at a legendary hedge fund he builds models to determine if his risk/reward is sufficient for his trading rules. If not then he does not make the trade. Without giving away all the goodness in his book, or more of his trading strategy, the point is that Ravee has a very elaborate methodology for making a news trade, or fundamental trade.
Check out his book here. This book was recommended to me by Dr. Andrew Menaker, who had the book recommended to him by Denise Shull. Consider whether your fundamental trades employ the methodology strong enough to give you a news edge as a trader/investor.